HOW TO SELL YOUR BUSINESS
By Ayoade Apelegan
Businesses are sold for various reasons. Sometimes it’s a strategic move as the owner wants to move on to other ventures and selling their business is a great way to make some cash to fund their new venture. Sometimes, owners don’t have the time to run a business anymore. Sometimes they are in the business of business flipping which is buying and selling businesses as a form of investing.
The most tragic of reasons is a company is failing and the owner decides to sell it to try to make some money to float them as they figure out what to do next.
Reasons why business owners sell their businesses
- Business owner is retiring
- Business owner is burnt out
- Business owner is dealing with health problems
- Business owner is pursuing other opportunities
- Company has reached a high point for the business owner
- The business owner has overwhelming financial problems
- Business owner is looking for a change
- Company isn’t making enough money for the owner
- The business owner has a problem with partners or current investors
- Business needs a buyer with more capital to reach its maximum potential
- Declining revenue
- Death of owner
Checklist of documents to have when selling a business
If the business is a corporation, you’ll have your attorney assist with a corporate resolution that authorizes the sale of the business.
Ensure the sale is compliant with any termination rules outlined in the Memorandum of Association and Articles of Association.
If the business is one that has multiple owners, it must be ensured that all the owners have signed off on the sale of the business.
Have your attorney ensure the sale is compliant with any Articles of Organization and bylaws.
Consider whether you have personally guaranteed any liabilities of the business with third-parties (e.g. bank, vendor, etc.) and negotiate a release of those from those.
If it’s the name of the business that is being sold, it must be ensured that an attorney prepares legal documents that will give the new owner rights to use the name.
- Prepare all required government tax documents on both the state and federal level.
- Prepare necessary tax documents for transferring company-owned vehicles.
Financial Documents, Tax Documents and Asset Transfers
For this step, you need to gather your financial statements and tax returns dating back three to five years and have your accountant review them.
The following need is made available:
Income statement: Your income statement shows the gross revenue, operating expenses (OPEX), cost of goods sold (COGS), and profits and losses of your business. Potential buyers will use the income statement to determine how profitable your business is, and they’ll use an industry multiplier to determine their valuation. This shows the gross revenue, costs, profits and losses each year of the business.
Cash flow statement: This shows how money was received and paid out of the company and its resulting impact on business assets. The cash flow statement provides insight into how efficiently the business is with its most valuable asset – cash. Potential buyers will assess the operating, investing, and financing cash flow and will look at how the business manages working capital month over month.
Balance sheet: This shows the value of all tangible assets owned by your business minus the liabilities your company owes. The balance sheet shows potential buyers an overview of your business’s assets like equipment, land, inventory and accounts receivable. It also shows your liabilities like debts, loans or other payables. The balance sheet shows a company’s liquidity, and potential buyers can use metrics like debt-to-equity ratio from the balance sheet to assess risks.
Seller’s discretionary earnings statement: The SDE (owner’s cash flow statement) is a business valuation method that reworks the income statement to show the full earning potential of your business. The SDE takes your income statement and adds back in discretionary items from the owner like salary, benefits and depreciation. This shows how much the business makes after adjusting for extraordinary, non-recurring and discretionary expenses. This means it presents more accurately how much money the business generates for the owner, which is of major importance to potential buyers.
But there are many more documents beyond financials that are integral to the selling process. Your buyer is going to want documents like a list of equipment, staff, company procedures, contracts and more.
Here are some of the key documents involved in a small business sale process:
|Schedule of tax returns||Returns for the last 3-5 years, enabling the buyer to verify revenues shown in financial statements|
|Business financial statements||Statements for the current and past 3-5 years, including income statements, balance sheets and current cash flow statement|
|Seller’s discretionary earnings (SDE)||Your most recent annual income statement adjusted to reflect revenues and essential operating costs without extraordinary, one-time or discretionary expenditures|
|Current building lease||Including information on lease duration and whether it can be transferred|
|Copies of contracts and agreements||Such as with vendors, suppliers, distributors, independent contractors, government and more|
|Intellectual property documentation||Patent and trademark information|
|Management and operational documentation||Including procedural manuals, product and pricing lists, other reports and agreements.|
|Staffing records||Including a list of employees with hire dates, salaries, contracts and benefits|
|Business formation documents||Documents like article of association, memorandum of association, business or partnership agreement|
|Additional documents||Inventory accounts receivable and accounts payable, suppliers and distributors, major equipment, fixtures and furnishings|
It’s best to put all these key documents in a packet, including an executive summary describing how the business is conducted, along with its purpose and goals.
While all this is going on, it should be ensured that the company is presentable, especially if there is a physical property. The business environment should be clean and any equipment that’s broken should be repaired well before getting too deep into the sale process.
Final Purchase Price Negotiations: It should be ensured that there is agreement on the following:
The price for prorated rent, utilities, and other fees;
Agreement on the value of any remaining inventory (if any);
Agree on a price all outstanding accounts payable and accounts receivable, and/or set up a contingency to cover these costs.
Ensure Insurance documents have been transferred or set to cancel.
Determine what furniture and equipment will be included in the sale and what will be removed from the property and kept or sold off separately.
Security agreements from the buyer (including any guarantors),
Succession agreements for employee benefit plans, profit sharing, flexible spending, and bonus schedules.
Steps to selling a business
Make sure your accounting records and books are professional
This goes beyond making sure you have the right documents. It also includes presenting your records in the “right” manner, in a way that not only accurately represents the P&L, balance sheet and cash flow, but does so in a professional manner.
Buyers of a business need to be able to tell what your business would look like if they owned it. Do you drive a company car which has a personal automobile lease? Do you reimburse mileage expenses to yourself? It’s possible your buyer won’t have those accounting entries. If you’ve booked these as generic travel expenses, a buyer cannot know how to carve those expenses out to determine what their P&L will reflect. Or you may have infrequent expenses you had incurred during the past three years that should be excluded in a buyer’s analysis of recurring cash flow. There may be moving expenses if you’ve moved to a larger facility or unusual legal expenses.
Go through your records for the last three years, including year to date (a buyer will need to know that your company’s financials remain consistent through the current year); including financial statements, and review your tax returns as well. Better yet, hire an accountant to review your books. They will be more likely to see something out of the ordinary than you are.
Identify the parts of your business financials that need attention and “fixing” before you offer your company for sale and make journal entries that will help a buyer identify these topics.
Consult your financial advisor
While you are working on the above, it’s also a good time to speak to your tax advisor for help planning for your post-sale financial future. Understanding your personal and corporate tax circumstances may also help you understand your options concerning the deal structure for a sale.
Organize your legal paperwork
At some point during the selling process, the buyer will start conducting serious due diligence. Included in this step is reviewing as many, if not every, legal document related to your business. These include the original incorporation papers, all employee and independent contractor agreements, customer agreements, vendor contracts, your lease, benefit plans you may have set up and whatever other documents you have signed with other parties. Even for a small business, this could run into the thousands of pages, which can be a time-consuming task. The earlier you start, the easier it is to fix any issues, find any missing documents and be prepared to deliver your due diligence documentation to a buyer in a timely fashion.
Get a business valuation
This is trickier than you might think. Common sense tells us that getting a professional valuation will help us establish a price to ask for our business. There are several common ways of obtaining an estimate of the value of your company. Professionals will look at your industry, your target market, your position in the market, your operations, revenue, expenses, cash flow and the strengths and weaknesses of your company compared to competitors. Typical professionals who perform business valuations are accountants, business brokers and for larger companies, investment bankers.
Often determining the value of your company will take into account your annual profits for the last several years, as an average, and then use some multiplier to determine a value. This is a tried and true method that has been around for decades and is likely a good place to start.
However, there is one critical concept that many entrepreneurs and even some valuation professionals overlook. Selling your company for the most money doesn’t mean that there is a specific number that your company “should” sell for as a maximum. This is because the value of your company could be drastically different depending on who is buying it. Let’s say you decide to use a multiple of 3X times net as your target selling price and this seems to be the going rate for your type of business in your industry. Along comes a company that is in adjacent industry and wants to enter your industry to complement their business. They could build a new company in your industry but that might take years and cost a fortune. A better way to enter the market could be to buy an existing company – your company. It provides quick entry and enables the company to start maximizing efficiencies between the new combined offerings. This company, anxious to enter the market to take advantage of these efficiencies, could well be ready to pay a premium above what someone “just” wanting to start a business in your industry would pay. Your company doesn’t have a static value; it could vary greatly depending on what potential buyers believe they can do with your company. (Source: www.exitadviser.com)
Transfer your business to the new owner
Once the business is sold, you need to transfer your business to the new owner, you need to:
transfer leases, licenses and permits
finalise tax returns, activity statements and instalment notices
Do you need business valuation services? Contact Matog Consulting on 08023200801 or email firstname.lastname@example.org. You can also fill the contact form below and we will get in touch with you.